Morning Report: Home prices rise 15% in April

Vital Statistics:

S&P futures4,2313.8
Oil (WTI)69.43-0.17
10 year government bond yield 1.57%
30 year fixed rate mortgage 3.17%

Stocks are flattish this morning on no real news. Bonds and MBS are up.

The upcoming week will be relatively data-light, however we will get some inflation data with the consumer price index. Year-over-year comparisons will be noisy given the lockdown of a year ago.

Home prices rose 14.8% in April, according to Black Knight Financial Services. There is just two months of inventory available for sale, which is the lowest since Black Knight started keeping records. Higher prices are driving down affordability, and the company estimates that it costs 20.5% of median income to make monthly payments on the median home price. This is high compare to the past decade, but below the historical average of 23.6%. The number of listings in April was down 60% compared to the 2017-2019 average. Note that Redfin says that asking prices are beginning to fall.

Lumber was limit down on Friday, as supply is finally catching up with demand.

The Fed is thinking about talking about considering the concept of reducing bond purchases, according to the Wall Street Journal. It wants to avoid the “taper tantrum” of 2013. “We’re going to have discussions about our stance of policy overall, including our asset-purchase programs, and including our interest rates,” Cleveland Fed President Loretta Mester said Friday on CNBC shortly after the Labor Department released what she described as “a solid employment report.” Note the Fed is planning on selling its holdings of corporate bonds and ETFs which it purchased last year to stabilize the credit markets.

June might be the pivot point for the economy’s second-half acceleration. Baseball stadiums will be back to full capacity, and the rest of California’s draconian COVID restrictions will end on June 15. The expanded COVID-19 unemployment benefits will lapse in September, which should be a catalyst for people to get back to work.

Morning Report: Jobs data disappoint.

Vital Statistics:

S&P futures4,20918.8
Oil (WTI)69.510.07
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.16%

Stocks are higher this morning despite a disappointing jobs report. Bonds and MBS are flat.

The economy added 559,000 jobs in May, according to BLS. This number was below Street expectations. Leisure and hospitality accounted for about half of the new jobs created. The April number was revised upward to 278,000 so that report remains surprisingly weak.

The unemployment rate fell from 6.1% to 5.8%, however the labor force participation rate fell from 61.7% to 61.6%. The employment-population ratio did rise however to 58%

Average hourly earnings rose 0.5% MOM and 2% YOY. The big increase in lower-paid leisure / hospitality jobs is pulling down average hourly earnings, and is a reversal of what we saw a year ago.

Note that the ADP report showed that close to a million jobs were added in May, so there is a good chance this payroll number gets revised upward in the next couple of reports. One other point to keep in mind is that the seasonal adjustments have probably been introducing noise into the series as last year’s payroll volatility was a huge shock. The non-seasonally-adjusted payroll number was close to ADP’s estimate.

Independent mortgage bankers made $3,361 on each loan in the first quarter of 2021, which was the best first quarter on record. It was a decline from the fourth quarter, however that reflects the normal seasonality of the business. “Despite dropping slightly from the fourth quarter of 2020, net production profits reached their highest level for any first quarter since the inception of MBA’s report in 2008,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “Triple-digit basis-point profitability was seen for the fourth consecutive quarter – another record that surpasses the 2012 boom generated from Home Affordable Refinance Program.”

Average volume fell slightly to $1.44 billion in the first quarter, and production revenue came in at 408 basis points. Net secondary marketing revenue decreased to 331 basis points from 346 in the fourth quarter. Purchase percentage fell to 39% from 43%.

Productivity fell to 3.6 loans per production employee from 4.2 in the fourth quarter. Since volumes were pretty much the same, it shows that mortgage banks added a lot of people in the first quarter.

Morning Report: The economy added a million jobs last month

Vital Statistics:

S&P futures4,183-22.8
Oil (WTI)68.910.07
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.16%

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

The economy added 978,000 jobs last month, according to ADP. Leisure / hospitality added 440k of these jobs. Education and health were the next biggest category at 139k. Note that the Street is looking for about 650k jobs in tomorrow’s employment situation report.

Nonfarm productivity increased 5.4% in the first quarter as output increased 8.6% and hours worked increased 3%. Unit labor costs rose 1.7% as compensation increased 7.2% and productivity rose 5.4%. The increase in productivity should be considered bond-bullish because it will counteract inflationary pressures. Productivity issues were a big driver of 1970s inflation as US plants were aged and becoming inefficient, while union contracts had big automatic escalators.

Initial Jobless Claims fell to 385,000 last week. We are still pretty elevated relative to historical norms, but nowhere near where we were a few months ago. Outplacement firm Challenger and Gray reported companies announced 24,586 job cuts last month.

A DC Appeals Court rejected an appeal by landlords to resume evictions. The moratorium is supposed to expire at the end of June. Sure would be nice to see property rights again in the US.

The Biden Budget is out, and like most of these documents is an aspirational document not meant to be taken seriously. Of note however is their interest rate assumptions: that negative real interest rates will continue for the next 10 years. In other words, the budget envisions the 90-day T-bill rate to be below inflation through 2031. GDP is expected to stabilize around 1.8% per year and unemployment is going to find a level around 3.8%. The 10 year bond yield is expected to gradually rise to 2.8%.

I don’t know what the assumptions are behind that projection, however it definitely assumes that the sovereign debt bubble that global central banks have inflated will not burst. Bubbles generally do not work that way, and we have never seen a sovereign debt bubble before, at least none that I am aware of.

China has followed the model of rapidly-growing states (the US in the early 1900s, Japan in the mid-1900s) where rapid growth creates credit and real estate bubbles. These bubbles inevitably burst, and the country goes through a multi-decade deflationary episode. The US deflation episode lasted from the mid 1920s through the early 1950s. Japan is still in its episode which started in the 1990s. If China does see the same thing, it will try and export its way out of it, which will mean inflation will remain low as it floods world markets with cheap goods.

In the past, investors would judge the sentiment of global government debt using gold. The barbarous relic is no longer considered much of an indicator, however cryptocurrencies will be the new barometer. I suspect more and more money will own crypto as a hedge against government profligacy. Which is why the government wants to ban it under the guise of preventing criminality.

Morning Report: High end home prices soar

Vital Statistics:

S&P futures4,2078.8
Oil (WTI)68.410.67
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.15%

Stocks are flattish this morning on no real news. Bonds and MBS are up small.

Mortgage applications fell 4% last week as purchases fell 3% and refis fell 5%. “Tight housing inventory, obstacles to a faster rate of new construction and rapidly rising home prices continue to hold back purchase activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “ The government purchase index declined to its lowest level in over a year and has now decreased year-over-year for five straight weeks. Purchase applications were down almost 2 percent from a year ago, but that was compared to the week of Memorial Day 2020.”

Loans in forbearance fell 1% last week to 4.18%, according to the MBA. “The share of loans in forbearance slightly declined, dropping by only 1 basis point, due to a slower pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Forbearance re-entries increased to almost 5.6 percent, as more homeowners who had canceled forbearance needed assistance again. There was also an increase in the share of PLS and portfolio loans in forbearance, while the share for Fannie Mae, Freddie Mac and Ginnie Mae loans decreased.”

In a bit of a post-bubble reversal, the highest-priced homes are seeing the biggest price appreciation. Up until very recently, high priced homes languished on the market, as there was little demand for anything over $1.5 million except for a few metros on the West Coast. Now, luxury properties in places like Austin, San Diego, and Phoenix are are seeing price appreciation approaching 20%.

“In the high-end market, we’re not only seeing multiple offers—we’re seeing buyers waiving appraisal and inspection contingencies, which doesn’t normally happen,” said Vincent Shook, a Redfin real estate agent in Phoenix. “The biggest driver is the influx of people from California. Still, competition remains toughest for buyers of affordable and mid-priced homes.”

Shook continued: “Some buyers with more modest budgets are coming to me and saying, ‘I want a four-bedroom home and here’s my maximum price.’ I’ve had conversations where I’ve had to be brutally honest and tell them that home literally does not exist anymore. It existed eight months ago when they started looking, but they wanted to wait in hopes that prices would come down. Prices didn’t come down, and now they’re priced out of the market.”

The Biden Administration has unveiled a home rehab tax credit, which is targeted towards low-and-median income borrowers. The idea is to encourage rehabbing of older homes. The buyer must make no more than 140% of the area median income, and will apply to only 1 in 4 census tracts, and the final sale price of the home cannot exceed four times the area median income.

Morning Report: Home prices increase 13%

Vital Statistics:

S&P futures4,22522.8
Oil (WTI)68.592.27
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.15%

Stocks are higher this morning after we return from a 3-day weekend. Bonds and MBS are down.

The big event this week will be the jobs report on Friday. Given April’s disappointing payroll number, investors will be looking to see if it is revised upward.

Home prices rose 13% in April according to CoreLogic / Case-Shiller. They are forecast to rise only 2.8% over the following 12 months. A lack of inventory is driving home prices higher, and that is often due to older homeowners preferring to stay in their homes longer. Boomer owner-occupants are staying in their homes for 13 years, which is 50% longer than previous generations. Most of the country has seen double digit appreciation except for New York, where appreciation is close to 0%.

The eviction moratorium is scheduled to expire at the end of June. The CDC estimates that 15% of renters are behind on their rental payments, which means that eviction filings should have a huge bump if the CDC doesn’t extend the moratorium again. Housing advocates are arguing that it should be extended, at least until some rental aid checks are distributed, but with the economy re-opening, it is getting harder to argue that the original reason for the moratorium is still a valid one.

Manufacturing expanded in May, according to the ISM Manufacturing Report. New Orders improved, while production and employment-related sub-indices fell. Prices fell, which is surprising given that shortages continue to be an issue.

The manufacturing economy continued expansion in May. Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.

Construction spending rose 0.2% MOM and 9.8% YOY, according to Census. Residential construction rose 30% on a YOY basis, which was driven by depressed numbers during the lockdown days.

Morning Report: Personal Incomes fall

Vital Statistics:

S&P futures4,20911.8
Oil (WTI)67.290.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.16%

Stocks are higher this morning as we head into a 3 day weekend. Bonds and MBS are flat. Note the bond market closes early today.

Personal Incomes fell 13.1% in April, which was driven by March stimulus checks. Personal spending rose 0.5%, while the savings rate came in at 14.9%. The Personal Consumption Expenditures index (inflation) rose 0.6%, and 0.7% ex-food and energy. On a YOY basis it was up 3.6% overall and 3.1% ex-food and energy. We will see elevated annual figures for the next several months as COVID lockdowns a year ago introduce noise into the numbers.

The US savings rate has been elevated since the COVID lockdowns were imposed. I suspect a lot of this has been due to reduced spending on experiential stuff – i.e. vacations, eating out, etc. The economic consensus seems to be that the elevated savings rate will reverse this year and that higher spending will drive growth in the second half of the year. That said, the Atlanta Fed’s GDP now tracker for the second quarter has been trending down, having just fallen from 10% to 9%.

Pending Home Sales fell 4.4% in April, according to NAR numbers. On a YOY basis, however sales were up 51.7%. “Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes,” said Lawrence Yun, NAR’s chief economist. “The upper-end market is still moving sharply as inventory is more plentiful there.”

Loans in forbearance increased according to numbers out of Black Knight Financial. The number rose 16k to 2.2 million homes. This is 4.1% of homeowners.

Fannie Mae’s new “Refinance Now” program opens June 5. These are basically high LTV refis. They will be limited to primary borrowers at lower than 80% of the area median income income, and will be subject to the GSE high risk loan limits. They also must have a DTI under 65% and an LTV below 97. The minimum FICO is 620.

Morning Report: Is real estate really an inflation hedge?

Vital Statistics:

S&P futures4,1911.8
Oil (WTI)65.73-0.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.13%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

The second estimate for Q1 GDP was unchanged at 6.4%. On the other hand, personal consumption was revised upward from 10.7% to 11.3%. The personal consumption expenditures index (the preferred inflation index by the Fed) rose 3.7% in the first quarter. Ex-food and energy, it rose 2.5%. This is above the Fed’s 2% target.

Corporate profits were flat in the first quarter. Note the stock market was up 9% over the quarter while the 10-year bond picked up 83 basis points in yield during the same period. The stock market looks like it is over its skis a little

Initial Jobless Claims came in at 406,000 last week. While the number is going in the right direction, it is still almost double where we were pre-COVID. These sorts of numbers were what we saw in the bad old days of 2009-2010

Durable goods orders fell 1.3% in April. Ex-transportation they rose 1%. Core capital goods (a proxy for business capital investment) rose 2.3%.

Luxury builder Toll Brothers reported a 21% increase in revenues in its second quarter earnings. EPS rose 71% while backlog hit a record. Higher input prices are evidently not a factor as gross margins increased and the company is guiding for them to increase further.

Newco-spelled-backwards bought a $48 billion servicing portfolio from Amerihome which was recently bought by Western Alliance.

Is real estate really an inflation hedge? Investors are piling into real estate right now, at least on the residential side. Academic studies have looked at the 1970s as kind of a test for this hypothesis. During the 70s, stocks languished while real estate rose in price. The big question however concerns rent growth and that is a tougher issue. Apartment REITs have struggled to raise rents over the past year, however that is certainly COVID-19 related.

The 1970s also corresponded to the baby-boom’s first housing purchases, while the inflation of the 1970s was pretty much unrelated to demographics (OPEC and declining productivity was the culprit in the 70s).

Investors IMO are buying SFR real estate because the cap rates (mid-single digits) are attractive enough in this low interest rate environment, and when you add in double-digit home price appreciation, you have an outsized return compared to the other asset classes out there. Multi-fam is probably less attractive, given the current political environment.

Morning Report: Is the Fed pushing up real estate prices?

Vital Statistics:

S&P futures4,19813.8
Oil (WTI)65.33-0.77
10 year government bond yield 1.57%
30 year fixed rate mortgage 3.13%

Stocks are higher this morning on no real news. Bonds and MBS are up small.

Mortgage applications fell 4.2% last week as purchases increased 2% but refis fell 7%. “Mortgage applications decreased last week as mortgage rates increased to 3.18 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinances dropped 7 percent as a result, driven by declines in both conventional and government refinance activity. “Purchase applications increased for the second time in three weeks, rebounding after a rather weak April with mostly weekly declines.”

The decrease in refinance activity makes some sense, but with home prices appreciating so rapidly, equity is being created at a rapid clip. This is a fertile environment for borrowers to do cash-out refis to pay off a HELOC or credit card debt.

Is the Fed’s policy of buying mortgage backed securities fueling the rise in home prices? At least some are making that argument. The Fed’s buying is pushing mortgage rates lower than they would otherwise be, and that is permitting people to buy more house than they otherwise would be able to. Even Boston Fed President Charles Evans thinks that the MBS purchases might be unnecessary at this point.

“The Federal Reserve’s asset purchases artificially lower interest rates and financing costs, which reinforces the buyer’s need to pay higher prices. It is even further detrimental because the higher price means that the buyer is borrowing more and taking on additional leverage,” said Michael O’Rourke, chief market strategist at JonesTrading, in an interview.

It is an interesting point, however in the context of close to $4 trillion in origination last year (according to the MBA) it is hard to imagine that $40 billion a month is moving the needle all that much. I have to imagine that competitive behavior between the big originators is having a much bigger impact.

Of course the bigger question is whether the Fed’s MBS purchases are necessary in the first place, and originators were fending off margin calls from their brokers on a daily basis a year ago, which was partially driven by the Fed’s buying.

I think it is a stretch however to link the Fed’s buying to home price appreciation. That is due to a fundamental supply / demand imbalance in the housing market, driven by over a decade of under-building. Once the COVID-19 driven supply shocks work their way through the system, we should see housing starts return to a level to meet the demand out there.

That said, does the Fed’s policy in general push up asset prices? I would argue that it does, however that goes back to the dual mandate, which is a law passed over 40 years ago. It says that the Fed must maximize employment in the context of controlling inflation. While a well-intentioned policy, like most everything the government does, there have been unintended consequences. In practice, the policy tells the Fed to keep the pedal to the metal as long as inflation (as measured by consumer prices) is behaving. What about asset price inflation? Doesn’t count. The dual mandate coincides with the mother of all bull markets in stocks, bonds, and real estate. The Fed inflated a stock bubble in the 9os, and inflated a residential real estate bubble in the aftermath. They now have a sovereign debt bubble (not just the Fed, central banks globally following the same asset support playbook). I don’t see how you can look at the German Bund with over 2 years of negative yields and think otherwise.

Speaking of COVID-19 driven supply shocks, it looks like lumber prices might have peaked. Descending lower highs are usually a technical signal that the party is over and it is time to find your coat and call your Uber.

Wall Street CEOs head to the Hill today to get grilled by Democrats over income inequality. Elizabeth Warren says it will be “fun.” Expect to see a focus on loan servicing.

Morning Report: Home Price Appreciation is on fire

Vital Statistics:

S&P futures4,20713.8
Oil (WTI)66.64-0.37
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.15%

Stocks are higher this morning after dovish comments from Fed officials yesterday. Bonds and MBS are up small.

New Home sales fell 5.9% MOM, but are up 48% on a YOY basis according to Census. The seasonally-adjusted annual rate came in at 863,000. At the end of April, there were 316,000 houses for sale, which represents a 4.4 month supply at the current pace. The median home price rose just under 5% to 336,900. This number is a surprise given the rising price of lumber and the increases in existing home prices.

Loans in forbearance fell 3 basis points to 4.19% last week, according to the MBA. “The decline was smaller than the prior week due to a slower pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Although the overall share is declining, there was another increase in forbearance re-entries. Currently, 5.3 percent of loans in forbearance are homeowners who had canceled forbearance but needed assistance again.”

House prices rose 12.6% in the first quarter on a year-over-year basis according to the FHFA House Price Index. “House price growth over the prior year clocked in at more than twice the rate of growth observed in the first quarter of 2020, just before the effects of the pandemic were felt in housing markets,” said Dr. Lynn Fisher, Deputy Director of FHFA’s Division of Research and Statistics. “In March, rates of appreciation continued to climb, exceeding 15 percent over the year in the Pacific, Mountain and New England census divisions.”

These growth rates are staggering, although I would be careful putting too much stock into them as lockdowns from a year ago are probably introducing some noise into the data.

The Case-Shiller Home Price Index reported that prices rose 13.2% in March. Phoenix home prices were up 20%, while San Diego was 19% and Seattle was 18%.

With such rapid price appreciation, buyers are competing with each other for property. Non-contingent bids (especially cash offers) are one way to do that. According to the NAR, cash bids are now 25% of purchases. The difficulty of getting FHA and VA loans means that these buyers are at a disadvantage.

Consumer confidence was essentially unchanged in May, according to the Conference Board. “After rebounding sharply in recent months, U.S. consumer confidence was essentially unchanged in May,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of present-day conditions improved, suggesting economic growth remains robust in Q2. However, consumers’ short-term optimism retreated, prompted by expectations of decelerating growth and softening labor market conditions in the months ahead. Consumers were also less upbeat this month about their income prospects—a reflection, perhaps, of both rising inflation expectations and a waning of further government support until expanded Child Tax Credit payments begin reaching parents in July. Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further, and the economy fully reopens.”

Morning Report: The MBA updates its origination forecast.

Vital Statistics:

S&P futures4,17524.8
Oil (WTI)64.440.77
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.17%

Stocks are higher this morning as commodity prices fall. Bonds and MBS are flat.

China has vowed to crack down on commodity speculation and this is having reverberations throughout global commodity markets, especially the metals. Since commodities generally correlate, we could see some pressure on lumber, which would be welcome in the US.

We have a big week of economic data, with real estate prices, new home sales, GDP and personal income / spending. We will also have a lot of Fed-speak.

Economic activity moderated in April, according to the Chicago Fed National Activity Index. Production-related indicators added to the index while consumption and housing deducted from it. This is consistent with some of the weaker data we saw in April, especially retail sales and employment.

Shortages – of land, lumber, gypsum and labor – are restricting development of new homes. The number of actively selling subdivisions is off 30% compared to 2019. As one developer noted: The “L’s: location, location, location” now mean “lumber, lumber, lumber.” Builders are now paying about $48,000 in softwood lumber for the average priced home.

The MBA updated its origination forecast. The advocacy group now predicts that 2021 origination will come in at $3.4 trillion before dropping to $2.3 trillion in 2022. Purchase originations will continue to increase while refis will fall off a cliff. They forecast that the 30 year fixed rate mortgage rate will average 3.5% in 2021 and 4.2% in 2022. Interestingly, the mortgage rate will increase faster than the 10-year bond yield. I am not sure what would drive that, given that the big mortgage originators (Rocket, United Wholesale, etc) are girding for a price war.

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